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People shouldn’t be an economy’s main export

People shouldn’t be an economy’s main export
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First Published: Tue, Sep 18 2007. 02 15 AM IST
Updated: Tue, Sep 18 2007. 02 15 AM IST
An hour’s drive south of Mexico City, Cuernavaca doesn’t seem the best place to glean insights about Asia’s outlook. Yet, the city of more than one million people is ground zero in Mexico’s attempt to do what a number of Asian nations also should: keep more of its workers at home. Asia’s future prosperity may depend on doing just that.
With its temperate climate, Cuernavaca long ago was a favourite retreat for Aztec kings, Spanish conquistadores and European monarchs. Its labour force also attracts global giants such as Nissan Motor Co. These days, though, the flow is often in the other direction. An increasing number of locals are heading abroad for higher wages. The question is when the exodus will undermine the nation’s economy.
The simplest definition of globalization is the free movement of goods, capital and people. While the first two elements have long been part of the global system, the mobility of people has lagged. Just ask Indians and Indonesians who have been accepted to Harvard University, but can’t get a US visa.
In recent years, more and more workers from the Philippines to Sri Lanka have found a way overseas to find opportunities they lack at home. Doctors are leaving Manila and becoming nurses in Chicago because the pay is far better. Young women are leaving Colombo and Jakarta to become nannies or maids in London.
Downside
Such migration can be a godsend for developing economies. Overseas workers sent home about $206 billion (Rs8.3 trillion) last year, more than seven times the level in 1990, according to the World Bank. Those are official figures. Unofficially, the amount is much larger via the underground economy.
Remittances “are larger than direct foreign investment in Mexico, tea exports in Sri Lanka, tourism revenue in Morocco and the revenue from the Suez Canal in Egypt,” says Dilip Ratha, a World Bank economist.
The money helps stabilize financial systems, supports local consumption and real estate and pays for education and health care. World Bank studies show that countries where remittances account for about 11% of the economy—such as the Philippines—can reduce their poverty rates by about one-third. The downside is that governments become dependent on such revenue. Just as oil deposits and diamond mines let politicians off the hook, remittances give them fewer incentives to create well-paid jobs. With so much money flowing in, why bother fiddling with local industries?
Brain drain
Remittances also cause a brain drain for economies that need all the talent they can muster. When growing numbers of your youngest and brightest leave, the quality of your labour pool is diminished and economic growth is reduced.
Mexican President Felipe Calderon realizes that, and he’s planning to do something about it. Officially, Mexican workers sent an average of $2 billion a month home last year.
How vulnerable Mexico has become was apparent in a recent report by Gabriel Stein, a senior economist at Lombard Street Research Ltd in London.
Expectations that remittances will slow this year as the US clamps down on immigration are already causing a “sharp slowdown” in construction spending, he says.
One of Calderon’s priorities is “transforming Mexico from a Mexico that loses the best of its people through migration, into a Mexico that is capable of generating income opportunities for Mexicans here in their own land.”
Mexico’s example
That may sound like an obvious point, yet it borders on heresy when coming from a developing economy leader. In a speech in December, Calderon summed things up with a question: “Today we must ask ourselves: What accounts are we going to render to our children about what we did—or failed to do—for Mexico during these years in which we have lived?”
Asians should be asking that question about their own economies. In Manila, for example, there’s much backslapping about how the economy is growing 7.5% and the fiscal outlook is improving. Much of the stability that has returned to the Philippines is thanks to overseas workers.
In July, money sent back to the Philippines climbed 4.6% from a year earlier to $1.1 billion. Families at home use the funds to buy new places to live, mobile phones and fast foods. The nation has an unemployment rate of 7.8%, the third highest among 15 Asia-Pacific countries tracked by Bloomberg.
If President Gloria Arroyo were running an election campaign, her slogan could be: Vote for Me—And If You Don’t Like Me, Even Better, Leave and Send Money Home. At least tacitly, the Philippines encourages ever more citizens to leave. It’s heartening that central bank governor Amando Tetangco is devising ways to get Filipinos to employ remittances more productively. The initiatives include prodding banks to create financial products that could catch a bigger portion of capital inflows.
Arroyo’s government needs to do more. Asia’s developing economies must avoid falling deeper into this trap. The argument for remittances in the short run is sensible enough. In the long run, though, an economy’s biggest export should never be its people.
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First Published: Tue, Sep 18 2007. 02 15 AM IST